Yoann Ignatiew
General Partner, Head of International Equity and Diversified
The markets ended the quarter in positive territory for international equities, which were driven by the shift in core inflation(1) in the United States and by the end of China’s “zero-Covid policy”. The MSCI World gained +9.4% in the fourth quarter, and European markets outperformed US markets (Euro Stoxx 50 at +14.3% vs. S&P 500 at +7.1%). Chinese equities fared especially well in the last two months of the year, with the Hang Seng up by 14.5%(2).
The shift in inflation figures boosted investor risk appetite. In the US, core inflation weakened in October for the first time in one year. This was not only below the previous month, but also below the consensus forecast. In Europe, while total inflation also declined for the first time during the year, core inflation appears to be fluctuating around 5% for the moment. On the central bank front, the fourth quarter saw a slowdown in the pace of rate hikes, with the Fed and the ECB both raising their key rates by 50 basis points at their most recent meetings, to, respectively, 4.25% and 2.50%. However, they did stick to their hawkish tone, and Jerome Powell reiterated the need to slow down economic activity, in order to rein in inflation. In the United States, while the economy appears to be slowing down, based on the drop in the latest PMI(3) releases, the job market remains extremely solid, with a historically low unemployment rate of 3.5%(4). The latest releases nonetheless showed a slower increase in wages, thus providing some relief from fears of sustained wage inflation.
Europe, meanwhile, appears for the moment to be benefiting from a stabilisation of the front lines in Ukraine, macroeconomic releases that may not have been brilliant but were still above forecasts, and falling natural gas prices, which is reassuring for this winter. And China seems to have entered clearly into a new phase in managing Covid, which has so far been the main obstacle to regional growth. The Party’s shift in line with regard to the Chinese people, including its view that the Omicron variant was less dangerous, raises hopes for a full reopening of the economy in 2023. That being said, a recovery in the region is a double-edged sword – on the one hand, it could propel global growth forward, but on the other hand, it could feed inflation. R-co Valor gained 5.6% on the quarter(5). In terms of contribution, manufacturing stocks fared well, driven by the rebound of cyclicals, particularly European ones. Financials were the worst contributor, after being hit specifically by a US stock. As for changes to the portfolio, we stuck with our strategy of taking profits by reducing our exposure of stocks that had rallied, such as Bombardier, Morgan Stanley and Richemont. Within the healthcare sector, and based on a resolutely bottom-up(6) approach, we reduced our holdings in AstraZeneca, Pfizer and BioMarin Pharmaceutical, while raising them in Seagen (a biotech) and, to a lesser extent, Roche. Meanwhile, we also added to our exposure of certain tech and financial stocks in the portfolio. On the money market, late in the year we added French government bonds maturing in less than one year and yielding between 2.3% and 2.8%.
R-co Valor: Portfolio’s geographical and thematic breakdown
Portfolio Allocation
As of the end of December, the fund’s equity exposure was 41.0%,
while its bond exposure was unchanged at 49.3%(1).
R-co Valor Balanced: Breakdown by asset classes
Equity allocation
R-co Valor Balanced equity allocation replicates that of R-co Valor.
Both funds have the same exposures and are subject to the same modifications.
R-co Valor Balanced: Geographical and thematic breakdown of the Equity pocket
Fixed income allocation
Interest rates moved up further late in the year, albeit at a more measured pace. The 10-year Bund yield ended at 2.56% (+46 basis points (bps)), and the 10-year US yield at 3.87% (5 bps)(2). At the central bank level, the slower pace of in key rates, particularly by the ECB, drove the euro corporate bond market to its only positive quarter of 2022, at +1.2% by investment grade(3) and +4.5% by high yield(4)(2). Within the fund’s bond allocation, we took advantage of some very attractive investment grade yields to seize some opportunities, mainly on the primary market, with intermediate maturities and a limited credit risk. We also positioned ourselves opportunistically on the secondary market on financial issuers. Our high yield and non-rated exposure were lowered marginally on the period and now accounts for 18% of the bond allocation. Market conditions allowed us to raise the portfolio’s yield significantly during the year, to 6.6% as of end-December, with sensitivity(5)of 3.5(6).
R-co Valor Balanced: Geographical and by rating breakdown of the fixed income pocket
Completed on 11 January 2023.
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